Caring for the Community: Profit Sharing and the Trickle Effect of the Triple Utility $FORM Token

Article 5 of 7

Executive Summary

• Up to 50% of the trading profit will be earmarked for distribution to the investors who hold $Form tokens along with either Parity, Alpha, Beta or Gamma.
• “Trickle effect” mechanism ensures that the rewards will be paid out slowly while the amount of the profits designated as performance fees and the fraction of the fees that will be earmarked for the community will be varied at different stages of our growth cycle.
• Each of the four funds (Parity, Alpha, Beta, and Gamma) will operate as individual profit and loss (P&L) centers. Investors in Parity will get their share of the profits which are derived from how their investment will be split into Alpha, Beta and Gamma.

We desire to stay close to the spirit of decentralization by setting aside up to 50% of the trading profits we generate to be paid out to our long term investors. As we grow our funds, we will collect fees and generate revenues to offset our expenses. We see two clear recipients of the earnings we produce:

• the investors, and
• the team.

Our investors are those who hold $FORM and also those who will put capital into our Parity, Alpha, Beta and Gamma funds. Without our investors providing us capital there is little we could accomplish and they need to be rewarded accordingly. Also, the highly skilled individuals in our company build the vehicles to channel the funds received into pools that continue to expand. Their efforts are the key to increase the capital received and due appreciation needs to be shown. Also, a portion of the proceeds will be used to develop our organization and recruit the brightest minds so that we can continue to do our best and have the preeminent wealth management platform for the masses.

An extremely popular investor protection mechanism in the traditional finance world is the idea of performance fees (aka ‘carried interest’) and a high water mark. The simple summary of this concept is that performance fees are charged only when investors are entitled to a profit off their original principal. This is perhaps best clarified with a simple numerical illustration.

For example, let us say an investor deposits 10,000 USD. After some time, the invested amount grows to 14,000 USD, at which a high water mark is established. The profit in this case is 4,000 USD. A part of this profit is taken as performance fees. Now, if the value of the investment goes down to say 12,000 no performance fees are charged until the value of investment climbs back above 14,000, the high water mark. The bottomline is that unless a tangible wealth increase is generated for every investor, at a holistic level, no performance fees are paid. This creates a strong incentive for the team to produce solid returns for our investors.

This simple scenario can get extremely complicated when there are multiple investors who deposit at different levels of the fund price. Tracking all this in a smart contract, with the current state of blockchain technology, is extremely hard and can be deemed almost impossible. To be able to accommodate these complexities, we have found a novel solution that works elegantly, is rather straightforward to implement as a smart contract, provides the same level of protection to every single investor and is mathematically identical, in terms of fees and proceeds, to what investment funds in the traditional world have been doing for decades.

The point worthy of highlighting is that almost half of the performance fees we generate will be directed to a separate bucket, and kept aside, to be paid out regularly to our loyal investors. Loyalty here will be measured in terms of the length of time someone holds $FORM along with either Parity, Alpha, Beta or Gamma. If someone has to claim the full share of their reward, they need to stake $FORM and either Parity, Alpha, Beta or Gamma tokens and keep it staked to gather rewards.

The amount of $FORM and other tokens to be staked to claim the full rewards will be dependent on a ratio, such as 1:1 or 2:3 and so on. This is a parameter that can be changed depending on external factors such as the price of $FORM, the total investments, the amount of profits being generated and so on. To ensure greater equitability for our investors, who might invest a large sum into say Parity, if they hold a certain minimum amount of $FORM they need not adhere to this ratio of $FORM to other tokens to claim the full share of their profits. The fundamental criteria is that everyone needs to hold $FORM, in addition to any other investments they make and they need to continue holding $FORM, to be eligible to earn their rewards.

Another innovation we have designed, to ensure that investors are motivated to continue to hold $FORM, can be termed the “Trickle effect”. This mechanism will not pay out the bulk of the profits as and when they are generated, but the rewards will be paid out slowly. For example, if the profits we have put into the community pot today is 100,000 USD. All of this will not be given away on the same day. Rather, a certain percentage will be paid out today, and a percentage of what remains will be given out the next day. Let us say, this payout percentage is 50%. Then the first day, USD 50,000 will be distributed to investors as rewards. If no additional profits are generated the next day, 50% of what is left will be distributed. So investors will get 25,000 on the second day and so on. If additional profits are added to the pool only a percentage of the total accumulated amount that can be shared will be paid out immediately and the rest will be retained for subsequent payouts. The result is that there is a strong incentive to continue to invest in our funds and hold $FORM to be eligible to claim the full stream of profits.

In addition to the above primary utility of $FORM, which enables one to have substantial participation in our upside, there are two additional reasons for someone to buy and keep $FORM. Holding $FORM gives someone the right to participate in the governance process when we start to operate as a DAO, Decentralized Autonomous Organization. Also, $FORM owners will be given access to hot, and upcoming projects with significant upside potential, through our dark pool. Hence $FORM will be a triple utility token.

The amount of the profits designated as performance fees and the fraction of the fees that will be earmarked for the community will be varied at different stages of our growth cycle. When significant profits are being generated, the possibility of using those proceeds to burn (retire) some $FORM (from the circulation) will be pursued so that it might act as a deflationary mechanism and prop up the token price. When we start to function as a DAO, some of these governance parameters will be subject to community input.

The bulk of the revenue we generate will be from performance fees. Setting aside, half of this for the community might seem excessive. To toe the fine line between growth (investment for future) and decentralization (distribution of profit to the community for now), during the initial stages of the lifecycle before transforming into a DAO, the parameters can be skewed towards favoring the growth. And even at a later stage, there will be a threshold in the distribution bucket, so that profits only in excess of that level will be handed out using the trickle effect. This threshold will be varied depending on the magnitude of profits, the stage of growth and future plans, risk provisions to accommodate unforeseen emergency funding requirements, and to ensure that both investors and employees are compensated fairly for their contributions.

Since Parity is a combination of Alpha, Beta and Gamma. Investors in Parity will get their share of the profits which are derived from how their investment will be split into Alpha, Beta and Gamma. Each of the four funds will continue to operate as individual profit and loss (P&L) centers. Since claiming profits requires holding both $FORM and one of the other tokens, the total rewards will match and exceed the rewards from holding $FORM alone in the single sided staking pool, which will eventually be phased out entirely and replaced by this enhanced profit sharing plan.

Our profit sharing mechanism, and related innovations, will ensure that we are creating a strong economic incentive for investing in and holding our tokens (Alpha, Beta, Gamma, and Parity NFT), especially our governance token ($FORM). The other unintended, yet perhaps welcome consequence, will be that we might become the trendsetters clearing the path for other enterprises to be able to share their proceeds with all their stakeholders, which is the true hallmark of decentralization.

Our Socials

Website: https://formation.fi

Telegram: https://t.me/FormationFi

Twitter: https://twitter.com/FormationFi

Medium: https://formation-fi.medium.com